Many small businesses fail to calculate the cost of producing each new unit they sell, making it almost impossible to accurately determine profitability. In this article we look at what you need to think about when calculating your cost per unit.
The most common mistake when calculating unit costs, is not including an allowance for the owners salary and super contributions in the overheads. The formula is total fixed costs plus total variable costs divided by total units produced. (In simple turns ALL COSTS divided by units produced).
Remember that the fixed costs per unit will decrease the more units you create. For instance your variable cost may include rent. (Unless you are in a shopping centre where your contract indicates you pay additional rent on turnover over a certain value then the costs stay the same no matter how many units you create. (Your rent can increase however if you outgrow the premises). Variable costs are items that increase the more you produce, for example the materials and packaging for your products.
When calculating your expenses, don’t miss a thing otherwise your profit margin will not be correct. Allow for taxes, delivery fees, warehouse storage, bank fees and interest, staff wages, payroll tax, and superannuation. Another cost most people miss is the cost of acquiring customers, advertising and samples.
Having a clear understanding of your unit costs, enables you to create business strategies that help you grow your business profitably.